Businesses have called for the Australian government to soften their tax treatment of local companies as a leading firm establishes an offshore parent to save millions of dollars in taxes.
James Hardie Industries, the Australian building materials group, has announced that it is to incorporate a Netherlands parent company. The new structure is set to boost after-tax profits by $30million a year ($15 million) by allowing the company to maintain a global tax rate of 25-30% over the long term, compared to the 40-50% that it pays under its present structure.
"Higher rates of foreign tax are imposed on our foreign income when it is repatriated to Australia to pay dividends to shareholders. Under the current structure, this problem will increase as international demand for our products grows," said Peter Macdonald, chief executive.
Moving to a Dutch base will cut the firm's dividend withholding tax from a minimum of 15% under Australian regulations to a maximum of 5%.
Though the Australian government cut its corporate tax rate from to 34% to 30% this month, Michael Clough, senior tax partner at Mallesons Stephen Jaques, said the government has been very slow to introduce measures to keep companies in the country.
"The headline rate has been cut but companies focus on their overall tax rate: what the government gave away when it cut corporation tax, many people believe it took back when it amended the rules on thin capitalization and debt/equity ratios. Australia is a big importer of capital and these changes really matter."
Clough said the problem was four-fold. Australia does not have the same level of preferential tax treaties that many European countries and the US enjoy. Australian-based companies find it harder to access capital markets. Many firms have substantial overseas assets, and Australian competition laws can be a barrier to expansion. In this climate, the option to relocate looks increasingly attractive.
The move overseas by James Hardie is not an Australian first. News Corp and Lendlease are based abroad and the National Australia Bank and CSR, have warned they may consider relocating. BHP and Billiton have opted for dual listings in London and Australia, as have GKN and Brambles. A measure of the government's concern is that it agreed to the GKN/Brambles merger this week on condition that Brambles remains an Australian resident company and the headquarters of Brambles and the global headquarters of the dual listed group are in Australia.
The move comes in the same week that the UK and US signed a double-tax convention. Under the agreement, a zero withholding tax rate is set to apply to dividends flowing between the two countries. This is the first time the US has agreed to a zero rate and puts pressure on other economies to find ways to make their counties more tax-friendly to highly mobile multinationals.
